FX Daily: Dollar caught between many fronts
The desk's thesis positions the dollar as resilient amid various market pressures, particularly from the bond market and escalating trade tensions, notably with Canada. Per the full note source, the dollar is currently buoyed by a supportive bond market, with a significant focus on U.S. consumer confidence data and trade relations impacting CAD. While the dollar shows strength against key pairs like AUD and CAD, it remains susceptible to geopolitical tensions, especially relating to sanctions on Iran and ongoing U.S.-China trade dynamics. Current consensus suggests USD/CAD could push beyond 1.390, mirroring broader expectations of dollar strength against developed currencies.
What the desk is arguing
The desk suggests that the dollar is maintaining strength early in the week, largely driven by its relationship with the U.S. bond market. Per the full note source, the back-end of the curve's solid performance has provided the dollar with critical support amidst various geopolitical concerns and domestic data points.
Key developments include the unsettling Toronto-Montreal tensions, with trade tariffs set to impact the Canadian auto industry sharply. This backdrop is anticipated to propel USD/CAD towards levels above 1.390 based on trade-related fluctuations and the market's focus on central bank policy.
Where it sits in our coverage
The current consensus for USD/CAD is 1.385 with a range observed between 1.35 and 1.4034. Specific firm targets for December 2026 include: - Morgan Stanley: 1.3400 - Goldman Sachs: 1.3500 - Commerzbank: 1.3500
This desk's outlook aligns favorably with the consensus, as it aligns just below the higher end of the tracked forecasts.
How other firms see it
Most of the consensus-targeted firms expect dollar strength, with many forecasting a gradual uptick against developed currencies. Institutions like Morgan Stanley and Goldman Sachs have positioned for dollar strength, while contrary views from firms like TD Securities are more cautious on its durability, forecasting USD/CAD closer to 1.3700.
The evolving trajectory of USD/CAD is crucial, especially given the BoC's interest rate stance, which continues to diverge from the Fed's, adding layers to the current FX landscape. This narrative interplays with the broader implications of various trade partnerships.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Dollar shows resilience amid mixed signals.
- 02Key focus on U.S.-Canada trade tensions impacting CAD.
- 03Strength observed in USD due to supportive bond market conditions.
- 04Surveillance of geopolitical risks remains crucial for dollar stability.
Market implications
Traders should watch USD/CAD as it approaches critical resistance levels above 1.390 amidst evolving trade negotiations. The consumer confidence data set for release may further shape market positioning along with tech and commodity links affecting CAD valuations.
Risks to this view
Should a sudden escalation in U.S.-China trade tensions develop, it could undermine the dollar's current robustness. Additionally, any unexpected negative data surprises from U.S. economic indicators could necessitate an adjustment in long-dollar positioning.
AUD/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
UOB | Bullish | 0.7200 |
ING | Bullish | 0.7300 |
Rabobank | Bullish | 0.7200 |
Articles FX Daily: Dollar caught between many fronts Published 07:50 FX Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The dollar is starting the week on a firm footing, juggling several drivers at once: the bond market remains a key focus, while trade headlines are increasingly moving currencies, especially CAD as US-Canada trade tensions keep escalating. Attention today will also turn to data, with US consumer confidence and the German Ifo survey in the spotlight Francesco Pesole and Chris Turner Canada's auto industry remains in the crosshairs of US trade policy USD: Bond market helping a small recovery Developed currencies have started the week on a quiet note despite the abundance of headlines. The dollar continues to take cues from the US bond market, with a good session for the back-end allowing the greenback to find some support.
CNBC reported yesterday that the Treasury may use its account at the Fed (TGA) to fund its buyback operations for long-dated debt. Our rates colleagues argue that this would not be a big deal for the bond market, as buybacks funded through bill issuance today versus buybacks funded by running down the TGA and issuing bills later are largely equivalent. On Canada, the situation is still in the escalation phase.
Trump has announced 50% tariffs on Canadian autos and parts from 1 January. The distant implementation date suggests some caution around disrupting the auto sector ahead of the midterms, while also leaving ample room for negotiations. At the same time, both sides remain firmly in trade-conflict territory.
We think the rebound in USD/CAD can extend beyond 1.390. On Iran, the US announced a large sanctions package and, more importantly for markets, threatened other countries with economic punishment if they do not cut ties. China is the main focus here.
Any serious revival of the US-China trade spat would be negative for the dollar in our view, mirroring last year’s USD correlation with the issue. The US-Canada dispute could incidentally amplify that negative dollar reaction. On the data side, along with some housing figures, we will look at August consumer confidence figures following soft prints in June and July.
The balance of risks for the dollar remains skewed to the downside, but our baseline is for further consolidation into the Jackson Hole risk event later this week. Francesco Pesole EUR: Still a bit expensive Our models suggest the short-term fair value for EUR/USD sits just below 1.160, an indication there is probably some – albeit contained – risk premium on the dollar linked to the US Treasury buyback announcement from last week. That helps our view that EUR/USD is more likely to stabilise than take another leap higher – i.e. above 1.170 – at this stage.
Sources & References
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